ING Group Annual Report. Taking charge of change

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1 ING Group Annual Report 2012 Taking charge of change

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4 > We continued our focus on customer centricity and sustainability > ING posted 2012 underlying net profit of EUR 2,603 million in a challenging environment > Capital, funding and liquidity positions improved > ING continued to de-risk, streamline its portfolio and strengthen its businesses > Agreement reached with European Commission on amended Restructuring Plan > Further progress made towards State repayment and reduction in double leverage 2 ING Group Annual Report 2012

5 Contents Chairman s message 4 ING at a glance 6 Key figures 8 Composition of the Boards 9 ING share 10 Financial and regulatory environment 12 Strategy 17 Capital management 22 Risk management 24 Report of the Supervisory Board 56 Corporate governance 60 Report of ING Trust Office 73 Report of ING Continuity Foundation 76 Conformity statement 77 Consolidated balance sheet 90 Consolidated profit and loss account 91 Consolidated statement of comprehensive income 93 Consolidated statement of cash flows 94 Consolidated statement of changes in equity 96 Parent company balance sheet 312 Parent company profit and loss account 313 Parent company statement of changes in equity 314 Accounting policies for the parent company annual accounts 315 Notes to the parent company annual accounts 316 Independent auditor s report 321 Proposed appropriation of result 322 Risk factors 323 Additional Pillar 3 information 344 Financial glossary 370 General information 377 Banking overview 26 Retail Banking 30 Commercial Banking 39 Insurance overview 44 Insurance 48 Section 404 Sarbanes-Oxley Act 78 Remuneration report 80 Works councils 88 Accounting policies for the consolidated annual accounts 98 Notes to the consolidated annual accounts 118 Risk management 218 Capital management Who we are 2 Report of the Executive Board 3 Corporate governance 4 Consolidated annual accounts 5 Parent company annual accounts 6 Other information 7 Additional information ING Group Annual Report

6 Chairman s message Dear reader, Thanks to loyal customers, prudent balance sheet management and the determination of our staff to provide the best possible service to our customers, ING strengthened its position was a year marked by major change. In challenging times, ING has become a financially stronger company. Through divestments, ING has sharpened its focus and became smaller. The foundations for further changes are in place. Taking charge of change, the theme of this Annual Report, was the common thread across our operations: managing change to prepare for a new future as a fully independent bank and fully independent insurance businesses. The drive towards that future began four years ago, in 2009, when I became chairman of the Executive Board and was faced with the challenge of steering ING through the financial crisis. This required robust measures. We needed to change course. It was evident that we had to restructure our organisation drastically, not only because of the crisis and the lessons we drew from it, but because of the increasing call for sustainable financial services, for a change of culture. In brief, we needed to find a different way of working and so we rolled up our sleeves and we set changes in motion. In 2012, we further simplified our organisation, and we took significant further steps to reduce our risk profile, but at a cost. We also streamlined our product range and anticipated and implemented new regulations. On the banking side, we refined the strategy, and although our results were under pressure, we managed to strengthen the balance sheet and improve our capital and funding position. Moreover, our liquidity position remained strong. These steps were necessary in order to remain competitive and to be able to face the challenging external environment. The economic and financial market conditions in which we operated in 2012 were difficult, especially in the eurozone, a key geographical area for our company. Financial markets were influenced by the European sovereign debt crisis, with an interbank market that had virtually stopped functioning. Unemployment grew and consumer confidence in Europe declined. Specifically in the Netherlands, current levels of debt are still too high, which is hampering economic growth. The need for companies and households to deleverage further is bound to have negative effects on business banking in the Netherlands. For Europe as a whole, the demand for lending remained weak in The 2013 economic outlook remains uncertain despite efforts by the ECB. Added to this, for both banking and insurance there is ongoing uncertainty about the exact nature and timing of the implementation of many of the new regulatory measures, which are putting considerable pressure on costs. This is an area of concern, because if the financial sector is to facilitate sustainable economic growth, one needs to be careful about the timing and extent of the measures. An important priority remains to win back trust, the cornerstone of financial services; and it starts by being a strong and financially sustainable company that puts its customers first. Product development, for example, is something we are increasingly doing in cooperation with our customers, collecting feedback using tools such as focus groups and social media. We are also making every effort to ensure that we have excellent processes and services in place, so that customers can organise their financial affairs simply and easily. We are responding to the signals society is sending us. In this context, we have amended and tightened up our remuneration policy in In the Netherlands, we agreed on a new Collective Labour Agreement for Bank staff with the trade unions. Employees under the CLA will in principle no longer receive variable remuneration. In addition, we have taken further steps to tighten up the remuneration policy for senior management. We are maintaining an active dialogue with our stakeholders to explain our strategy, and to find out what they think and feel about ING. Personally, I have spoken to large numbers of customers this year at home and abroad on company visits, as well as at special customer seminars organised by ING. By actively engaging with customers, we can find out what really matters to them and get a better idea of what we can do to improve our services. There are two milestones I would like to mention. First, with the tranche repaid on 26 November 2012, 4 ING Group Annual Report 2012

7 ING brought the total repaid above the EUR 10 billion of capital support provided by the Dutch State in October The total repaid so far of EUR 10.2 billion consists of a principal amount of EUR 7.8 billion and EUR 2.4 billion in premiums and interest. Second, ING and the Dutch State reached an agreement with the European Commission on amendments to the Restructuring Plan we had to submit to obtain approval for the state aid we received. The amended Restructuring Plan gives us more time and greater flexibility to shape our future. Both the bank and the insurance businesses are on track. In January 2012, ING Bank updated its strategy and financial ambitions around three pillars: customer centricity, operational excellence and balance sheet optimisation. ING Bank wants to be the preferred bank of customers, the bank that customers recommend to others. To achieve this and as part of strengthening our customer-centric culture we are therefore converging to one model: easy and fair, and at low cost. In 2012, we have made progress towards operational excellence by improving our service and streamlining our organisation and systems. And we aim to optimise our balance sheet to enhance returns and to allow us to continue to support our customers and grow our loan portfolio without growing the balance sheet. We realise that having engaged and motivated employees is key to making our strategy a success. Therefore being a top employer is also a key priority for ING. The strategy is clear; it is now about the execution. In line with our strategic objectives of sharpening the Bank s focus and further strengthening its capital position, ING made a few divestments as a result of the continuous evaluation of its portfolio of businesses. In 2012, we sold ING Direct Canada and our stake in Capital One. In the first quarter of 2013, we sold ING Direct UK. The insurance businesses have made progress towards independent futures. The sale of a large part of the Asian insurance and investment management business was announced, and ING U.S. has made great strides in preparing for its initial public offering (IPO), bringing it one step closer to becoming an independent business. Preparations have been stepped up for the basic scenario of an IPO for the European insurance and investment management business. The streamlining and the sale of parts of the business adversely impact jobs at the bank and the insurance and investment management businesses. This is something we regret, but these measures are necessary and keep our organisation flexible in the current uncertain climate. I would like to thank our staff for their resilience. We have asked a lot of them and they have continued to step up to the plate. An important priority is to win back trust because trust is the cornerstone of financial services. Restoring trust starts by being a strong and financially sustainable company that puts its customers first. We have also made progress this year in the area of sustainability. As you might expect from a reliable financial partner, sustainability is anchored in our strategic policy, particularly when it comes to our social, environmental and ethical performance. For example, ING is one of the co-signatories of the United Nation s sustainable insurance principles. I would also like to mention the establishment of the Sustainable Lending Team which initiates and encourages sustainability opportunities successfully. Through a range of activities, we contribute to society. One example is our renewed partnership with UNICEF to give children all over the world the chance of a better future via education. We engage with all our stakeholders; actively observing and listening to their needs and comments and responding accordingly. That is what financial services are all about, and we are determined to deliver on that in a sustainable way. This is a challenge we are embracing with full conviction. I am convinced that we can build on the foundations we have laid. As of 1 October 2013, I will step down as CEO. The Supervisory Board intends to propose Ralph Hamers to be appointed as a member of the Executive Board at the annual General Meeting on 13 May 2013 and to succeed me as the next CEO as of 1 October I am sure that Ralph Hamers will continue to execute ING s strategic course. Until that date, I remain fully dedicated to leading ING as it shapes its future. There are still many tasks ahead as we work towards completing our restructuring programme. Jan Hommen Chairman of the Executive Board 1 Who we are 2 Report of the Executive Board 3 Corporate governance 4 Consolidated annual accounts 5 Parent company annual accounts 6 Other information 7 Additional information All these developments propel us further along the road towards a successful, independent future for our businesses. We are not there yet, but we can be proud of what we have achieved. ING Group Annual Report

8 ING at a glance OUR MISSION ING s mission is to set the standard in helping our customers manage their financial future. We aim to deliver financial products and services in the way our customers want them delivered: with exemplary service, convenience and at competitive prices. OUR PROFILE ING is a global financial institution of Dutch origin, currently offering banking, investments, life insurance and retirement services. We are concentrating on our position as a strong European bank with attractive home market positions in Northern Europe and growth options in Central and Eastern Europe and Asia, while creating an optimal base for independent futures for our insurance operations (including investment management). OUR STRATEGY To serve the interests of all stakeholders, increase management focus and create value for shareholders, ING is moving towards full separation of its banking and insurance operations. The separation is part of the Restructuring Plan required by the European Commission in order to gain approval for the Dutch state aid received in 2008/2009. ING Group s strategic priorities are: strengthening our financial position, restructuring, streamlining the portfolio, repaying state aid and building both stronger banking and insurance/investment management businesses, all based on sound business ethics and good corporate citizenship. ING Bank intends to be a strong, predominantly European bank, with leading domestic full-service banking positions in attractive, stable home markets, as well as a leading commercial bank in the Benelux with a strong position in Central and Eastern Europe. We will also continue to evolve our various ING Direct units into more mature full-service banking models. These initiatives in Europe, coupled with our positions outside Europe, should give the Bank attractive growth potential in the long term. ING will build on its global presence and international network and capitalise on its leadership position in gathering savings, multi-channel distribution, simple propositions and marketing. On the insurance side, the focus will be to optimise returns and value for the business as we prepare for separation. We will focus on earning our customers trust through transparent products, value for money and superior service. This reflects our universal customer ideal: saving and investing for the future should be easier. ING Insurance/Investment Management (IM) is preparing its businesses for standalone futures. ING Insurance/IM Europe and ING Insurance/IM US are preparing for base case initial public offerings (IPOs) and the sale of ING Insurance/IM Asia is in full progress. ING Insurance/IM will continue to focus on its customers and distributors by providing exemplary products and service. OUR CUSTOMERS ING serves a broad customer base, comprising individuals, families, small businesses, large corporations, institutions and governments. OUR STAKEHOLDERS ING conducts business on the basis of clearly defined business principles. In all our activities, we carefully weigh the interests of our various stakeholders such as customers, employees, supervisors, shareholders, civil society organisations and regulators. OUR CORPORATE RESPONSIBILITY ING wants to build its future on sustainable profit based on sound business ethics and respect for its stakeholders and to be a good corporate citizen. Our Business Principles prescribe the corporate values we pursue and the responsibilities we have towards society and the environment: we act with integrity, we are open and clear, we respect each other and we are socially and environmentally responsible. TAKING CHARGE OF CHANGE Financial position strengthened ING places great importance on strengthening its financial position in order to put itself in the best position to facilitate the real economy. Despite persistent market volatility and uncertain economic recovery in the eurozone and elsewhere, ING gained financial strength in Capital and liquidity improved, our funding position remained strong, earnings remained resilient, and net exposure to riskier asset classes and activities declined. Amendments to the Restructuring Plan In November 2012, ING and the Dutch State reached an agreement with the European Commission on amendments to its 2009 Restructuring Plan. The amendments extend the time and increase the flexibility for the completion of divestments, and also adjust other commitments in light of the market conditions, economic climate and more stringent regulation. Repayment to the Dutch State ING has made good progress in repaying the EUR 10 billion of capital support from the Dutch State. As part of the amended Restructuring Plan, ING has filed a schedule to repay the Dutch State in four equal tranches of EUR billion each. The first payment was made on 26 November The other tranches are due to be paid by November 2013, March 2014 and May So far ING has repaid EUR 10.2 billion, which consists of a principal amount of EUR 7.8 billion and EUR 2.4 billion of premiums and interest. Regulation and supervision ING supports the overall majority of international, European and national regulatory reforms taking place in the financial sector. However, ING is concerned about their cumulative impact, the uncertainty when and in what form they will be implemented, and how they will affect our role in financing the real economy. 6 ING Group Annual Report 2012

9 BANKING UNDERLYING INCOME 14,241m 2011: 14,289m UNDERLYING NET RESULT 2,147m 2011: 2,977m Banking ING s banking operations are divided into two main activities: Retail Banking and Commercial Banking. Retail Banking provides retail and direct banking services to individuals and small and medium-sized enterprises throughout Europe and Asia, with a base in our Northern European home markets. Our ambition is to transform ING Direct into a full-service bank. Commercial Banking offers services such as lending, payments and cash management in more than 40 countries to corporations, governments and other financial institutions Underlying result before tax (EUR billion) Underlying cost/income ratio (%) Underlying return on equity (%)*** ING GROUP INSURANCE* UNDERLYING INCOME 26,688m 2011: 29,045m UNDERLYING NET RESULT 456m 2011: 230m Insurance/Investment Management ING s insurance and investment management businesses include its life and non-life insurance, pension and asset management activities. These activities are divided into five business lines: Insurance Benelux, Insurance Central and Rest of Europe, Insurance US (excluding US Closed Block VA), US Closed Block VA and ING Investment Management. ING Investment Management provides a broad range of investment strategies and advisory services in Europe, the Americas and the Middle East Operating result (EUR billion)** Life & ING IM administrative expenses / Life & ING IM operating income (%) Underlying return on equity (%)*** * Excluding discontinued operations. The results of the Asia insurance and investment businesses are classified as net result from discontinued operations. ** Operating result is underlying result before tax excluding gains/ losses and impairments, revaluations and market and other impacts. *** Full-year underlying net result divided by average equity. 1 Who we are 2 Report of the Executive Board 3 Corporate governance 4 Consolidated annual accounts 5 Parent company annual accounts 6 Other information 7 Additional information ING Group Annual Report

10 Key figures ING Group in accordance with IFRS-EU in EUR million unless otherwise indicated Income Banking operations 16,102 17,908 17,734 12,293 11,662 Insurance operations (1) 26,689 29,133 28,035 26,644 39,142 Intercompany eliminations Total 42,644 46,691 45,433 38,601 50,513 Staff expenses and operating expenses Banking operations 9,632 9,889 9,649 9,665 10,122 Insurance operations (1) 3,752 3,447 3,463 3,469 4,103 Total 13,384 13,336 13,112 13,134 14,225 Addition to loan loss provision Banking operations 2,125 1,670 1,751 2,973 1,280 Result Banking result before taxation 4,134 6,028 5, Insurance result before taxation (1) ,182 1,537 1,282 Result before taxation 3,896 5,420 3,648 2,375 1,176 Taxation 799 1,246 1, Net result from continuing operations 3,097 4,174 2,502 1, Net result from discontinued operations (1) 908 1, Minority interests Net result 3,894 5,766 2,810 1, Figures per ordinary share (in EUR) Basic earnings (2) Shareholders equity (in parent) Balance sheet (year-end, in EUR billion) Total assets 1,169 1,279 1,247 1,164 1,332 Shareholders equity (in parent) Core Tier 1 securities (in EUR million) 2,250 3,000 5,000 5,000 10,000 (1) The results of Insurance/IM Asia and Insurance Latin America are shown in net result from discontinued operations. (2) See note 50 in the Annual Accounts. Capital ratios and other data Debt/equity ratio (1) 11.1% 12.7% 13.4% Core Tier 1 ratio 11.9% 9.6% 9.6% Insurance IGD Solvency I ratio 245% 225% 230% Underlying return on equity based on IFRS-EU equity 5.2% 6.5% 6.3% Employees (FTEs, year-end, excluding FTEs in discontinued operations) (2) 84,718 87,866 88,203 Market capitalisation (in EUR billion) (1) ING Group evaluates its debt/equity ratio on the basis of core debt and adjusted equity. Further information is provided in the section Capital management in the consolidated annual accounts. (2) Comparatives are excluding FTEs in entities divested in the years thereafter. ING Group evaluates the results of its businesses using a non-gaap financial performance measure called underlying result. Underlying result is derived from the result in accordance with IFRS-EU by excluding the impact of divestments, discontinued operations and special items. Historic underlying results have been restated for divestments in order to create a comparable sequence (i.e. 2012, 2011 and 2010 underlying results exclude the results of a divestment which was completed in 2012). See note 52 in the consolidated annual accounts for a reconciliation between IFRS and underlying result. Underlying net result in EUR million % change 2010 Banking operations 2,147 2, % 3,836 Insurance operations ,252 Underlying net result 2,603 2, % 2,584 Divestments, discontinued operations and special items 1,291 3, Net result 3,894 5, % 2,810 8 ING Group Annual Report 2012

11 Non-financial key figures Better customer experience % of business units that offer services or products for groups of people with special needs (1) 29.4% n.a. n.a. Better business Sustainable assets allocated (in EUR billion) (2) Better environment CO 2 emissions per FTE (in tonnes) (3) Better workplace Employee engagement score ING Bank Employee engagement score ING Insurance/IM (4) 68% 70% 66% 67% 69% 68% Better community Donations to UNICEF (in EUR million) (5) (1) We aim to offer our financial products and services to all segments of society, including young people, the physically challenged and the economically disadvantaged. Our branches therefore have barrier free access, ATMs are adapted for the visibly challenged and we develop products such as savings accounts for children and insurance products for cancer patients. (2) As a bank and asset manager, ING allocates assets to a wide range of companies, projects and funds. Increasingly, we include sustainability criteria in our capital allocation choices. For reporting purposes, we combine all the assets from our financing and investment activities under the heading Sustainable assets allocated. Sustainability criteria have been applied to these assets. During 2012 we nearly doubled the amount of Sustainable assets allocated, which is mainly attributable to an increase in sustainability mandates managed by ING Investment Management. (3) Our absolute carbon emissions decreased by 7% from 225 to 209 kilotonnes. However, due to divestments and restructuring of our organisation, the total number of employees decreased, resulting in a relative increase of carbon emissions per FTE. (4) Annually, we survey the level of employee engagement. We define employee engagement as the extent to which our employees are committed to contributing to our business performance and are willing to walk the extra mile to achieve ING s success. Given the operational split of ING Bank and ING Insurance, employee engagement surveys have been held at both companies. (5) Targets have been set to raise adequate funds between to facilitate access to education by one million children through our partnership with UNICEF. At year-end, more than 780,000 children had access to education. We are well on track to meet our target. Composition of the Boards* on 31 December 2012 EXECUTIVE BOARD Jan H.M. Hommen (69), CEO and chairman Patrick G. Flynn (52), CFO Wilfred Nagel (56), CRO SUPERVISORY BOARD Jeroen van der Veer (65), chairman Peter A.F.W. Elverding (64), vice-chairman J.P. (Tineke) Bahlmann (62) Henk W. Breukink (62) Jan H. Holsboer (66) Sjoerd van Keulen (1) (66) Piet C. Klaver (67) Joost Ch.L. Kuiper (65) Robert W.P. Reibestein (2) (56) Yvonne C.M.T. van Rooy (61) Luc A.C.P. Vandewalle (68) Lodewijk J. de Waal (62) (1) Resignation as of the annual General Meeting on 13 May (2) Appointed in 2012 as of 1 January COMMITTEES OF THE SUPERVISORY BOARD (3) on 31 December 2012 Audit Committee Joost Kuiper, chairman Tineke Bahlmann Henk Breukink Jan Holsboer Yvonne van Rooy Luc Vandewalle Risk Committee Piet Klaver, chairman Tineke Bahlmann Joost Kuiper Luc Vandewalle Jeroen van der Veer Remuneration Committee Peter Elverding, chairman Piet Klaver Jeroen van der Veer Lodewijk de Waal Nomination Committee Jeroen van der Veer, chairman Peter Elverding Piet Klaver Lodewijk de Waal * You can find more information on the members of the Executive Board on pages and on the members of the Supervisory Board on pages Corporate Governance Committee Henk Breukink, chairman Jeroen van der Veer Lodewijk de Waal (3) The current composition of the Supervisory Board Committees can be found on the Company s website (www.ing.com). 1 Who we are 2 Report of the Executive Board 3 Corporate governance 4 Consolidated annual accounts 5 Parent company annual accounts 6 Other information 7 Additional information ING Group Annual Report

12 ING share PROFIT RETENTION AND DISTRIBUTION POLICY ING Group s profit retention and distribution policy is determined by internal and external capital requirements and profitable business opportunities on the one hand and the capital providers dividend expectations on the other. ING Group s internal needs are determined by statutory solvency requirements and capital ratios, in excess of which ING Group needs to maintain healthy buffers. An important determinant are the credit ratings which are of high importance to ING Group, because they directly affect the company s financing costs and hence profitability. For their part, the capital providers expect a dividend which reflects ING Group s financial results and is relatively predictable. ING s policy is to pay dividends in relation to the long-term underlying development of cash earnings. Dividends will only be paid when the Executive Board considers such a dividend appropriate. Given the uncertain financial environment, increasing regulatory requirements and ING s priority to repay the remaining outstanding core Tier 1 securities, the Executive Board will not propose to pay a dividend over 2012 at the annual General Meeting. ING intends to resume dividend payments on common shares when all remaining core Tier 1 securities have been repaid to the Dutch State and regulatory capital requirements have been met. CORE TIER 1 SECURITIES In October 2008, to support its capital position, ING Group made use of capital support facilities by the Dutch Government by issuing EUR 10 billion of core Tier 1 securities to the Dutch State with a coupon of 8.5%. The core Tier 1 securities rank pari passu with common equity. In December 2009, ING repaid half of the core Tier 1 securities of EUR 5 billion plus a total premium of EUR 605 million. Furthermore, at the coupon reset date, 13 May 2011, ING exercised its option for early repayment of EUR 2 billion of the remaining core Tier 1 securities. The total repayment in May 2011 amounted to EUR 3 billion and included a 50% repayment premium. ING has funded this repayment from retained earnings. On 19 November 2012, ING announced that, together with the Dutch State, it reached an agreement with the European Commission on significant amendments to the 2009 Restructuring Plan. As part of the agreement, ING filed a schedule for repayment to the Dutch State of the remaining EUR 3 billion in core Tier 1 securities plus a 50% premium, in four equal tranches in the years A first tranche of EUR billion was paid on 26 November 2012, following approval by De Nederlandsche Bank (DNB), the Dutch central bank. This brought the total repaid to the Dutch State to EUR 10.2 billion, including EUR 7.8 billion in principal and EUR 2.4 billion in interest and premiums. It remains ING s ambition to repay the remaining support as quickly as possible and ING intends to accelerate repayments if possible and prudent under the prevailing economic circumstances. Given the ongoing crisis in the eurozone and increasing regulatory capital requirements, ING needs to take a cautious approach and to maintain strong capital ratios in the Bank as it builds towards the implementation of Basel III. Each subsequent repayment to the Dutch State requires prior approval from DNB, at the time ING decides to propose such repayment. LISTINGS Depositary receipts for ING Group ordinary shares are listed on the stock exchanges of Amsterdam, Brussels and New York (NYSE). Options on ING Group ordinary shares (or the depositary receipts therefor) are traded on the NYSE Euronext Amsterdam Derivative Markets and the Chicago Board Options Exchange. SHAREHOLDERS AND DEPOSITARY-RECEIPT HOLDERS WITH STAKES OF 5% OR MORE To the best of our knowledge, as at 31 December 2012, there were no shareholders or holders of depositary receipts for shares who reported to hold an interest of 5% or more as mentioned in the Dutch Financial Supervision Act, other than Stichting ING Aandelen (ING Trust Office) and Stichting Continuïteit ING (ING Continuity Foundation). Authorised and issued capital in EUR million Geographical distribution of ING shares* Year-end 2012 Year-end 2011 Ordinary shares authorised 3,480 3,480 issued Cumulative preference shares authorised 1,080 1,080 issued Shares in issue and shares outstanding in the market Year-end in millions 2012 Year-end 2011 (Depositary receipts for) ordinary shares of EUR 0.24 nominal value 3, ,831.6 (Depositary receipts for) own ordinary shares held by ING Group and its subsidiaries (Depositary receipts for) ordinary shares outstanding in the market 3, ,782.3 Prices depositary receipts for ordinary shares Euronext Amsterdam by NYSE Euronext in EUR Price high Price low Price year-end Price/earnings ratio* * Based on the share price at year-end and net profit per ordinary share for the financial year. in percentages United States 34 United Kingdom 20 France 11 Netherlands 6 Germany 6 Switzerland 4 Belgium 2 Luxembourg 1 Other 16 Total 100 * Year-end 2012 figures, estimated on information provided by Thomson Reuters Advisory Services. 10 ING Group Annual Report 2012

13 Investor relations To be kept informed of press releases and other ING news, you can subscribe to the service through our Investor Relations section at You can also download the ING Investors and Media app on which gives you access to the latest financial information and press releases both online and offline. Investors and financial analysts may contact: ING Group Investor Relations (AMP C ) P.O. Box BV Amsterdam The Netherlands Telephone: Fax: Main credit ratings of ING (1) Standard & Poor s (2) Moody s (3) Fitch (2) ING GROEP N.V. A A3 A ING BANK N.V. short term A-1 Prime-1 F1+ long term A+ A2 A+ ING VERZEKERINGEN N.V. short term A-2 Prime-2 F2 long term A- Baa2 A- (1) Still valid on 18 March 2013, the date of this Annual Report. (2) Standard & Poor s and Fitch long-term ratings for ING Groep N.V., ING Bank N.V. and ING Verzekeringen N.V. carry a negative outlook. (3) Moody s rating for ING Groep N.V. and the long-term rating of ING Bank N.V. carry a negative outlook, while the long-term rating of ING Verzekeringen N.V. carries a developing outlook. ING s long-term credit ratings are shown in the table above. Each of these ratings reflects only the view of the applicable rating agency at the time the rating was issued, and any explanation of the significance of a rating may be obtained only from the rating agency. A security rating is not a recommendation to buy, sell or hold securities and each rating should be evaluated independently of any other rating. There is no assurance that any credit rating will remain in effect for any given period of time or that a rating will not be lowered, suspended or withdrawn entirely by the rating agency if, in the rating agency s judgment, circumstances so warrant. ING accepts no responsibility for the accuracy or reliability of the ratings. One-year price development ING depositary receipts for shares Index 1 January 2012 = /12 03/12 05/12 07/12 09/12 11/12 01/13 ING FTSE 300 Banks FTSE 300 Life Insurance IMPORTANT DATES IN 2013* Publication results 1Q 2013 Wednesday, 8 May 2013, 7:00 a.m. Annual General Meeting Monday, 13 May 2013 Publication results 2Q 2013 Wednesday, 7 August 2013, 7:00 a.m. Publication results 3Q 2013 Wednesday, 6 November 2013, 7:00 a.m. * All dates shown are provisional. 1 Who we are 2 Report of the Executive Board 3 Corporate governance 4 Consolidated annual accounts 5 Parent company annual accounts 6 Other information 7 Additional information ING Group Annual Report

14 Financial and regulatory environment Adapting to change > > Financial environment still highly challenging > > ING adapting to financial sector reform Continuing challenges in the external environment had an impact on ING in 2012, the most prominent being the deepening of the eurozone sovereign debt crisis which created an extremely challenging financial market environment in the first half of 2012, until the European Central Bank (ECB) took action to relieve the immediate financial markets stress. The ECB s efforts were probably the main reason for financial market stability from the third quarter onwards. The current regulatory reforms taking place in the financial sector are aimed at making it more resilient to external shocks, and they have an impact on ING. We support the need to make financial institutions more resilient and the system as a whole more stable. We support the overall majority of international, European and national measures being undertaken, such as the required strengthening of banks core capital base. However, ING is concerned about the cumulative impact of the many different measures, the uncertainty when and in what form they will be implemented, and how they will affect our role in financing the real economy. CHALLENGES IN FINANCIAL ENVIRONMENT REMAIN The sovereign debt crisis continued in 2012 and its negative effect on the real economy escalated. Since the third quarter of 2012, the general financial market sentiment in the eurozone and in the US improved. By contrast, the real economy deteriorated in most of Europe during the second half of the year. EUROZONE SOVEREIGN DEBT CRISIS AFFECTED THE CREDIT AND EQUITY MARKETS IN 2012 The uncertainty about the future of the euro, combined with austerity measures taken in certain European Union member states, are among the reasons why the eurozone has been pushed back into recession. A modest recovery is only slowly taking hold in the US, while Chinese growth came off the boil in Globally, central banks have been providing additional support. Although this support probably has not been effective in curing the world s economic ills, it did stabilise financial markets. Both in the eurozone and the US, credit spreads followed a similar pattern during the year. In the first quarter, they decreased as market sentiment improved, which was fuelled by the ECB s Long Term Refinancing Operation (of which ING made no use). However, market sentiment deteriorated again at the end of the second quarter due to concerns about a possible break-up of the eurozone. From the third quarter onwards credit market sentiment improved (and therefore credit spreads were down) again, mainly because of the ECB expressing its commitment to the euro. The ECB president s promise of unlimited, if conditional, sovereign bond buying the so called Outright Monetary Transactions in August and September 2012 eased immediate stress. Since then, there has been an uneasy market balance, despite no actual ECB intervention. During 2012, equity indices followed a pattern that mirrored credit spreads, with an overall improvement over the whole year. EUROPE FALLS BEHIND, SIGNS OF revival IN US Economy Austerity measures started to weigh heavily on the eurozone economy in As unemployment increased, consumer spending remained weak and companies postponed investment decisions. Economic growth in the eurozone turned negative in the second quarter and remained negative for the rest of European financial markets remained under stress in the first half of the year. Whilst Europe was mired in recession, the US economy showed some signs of revival in the second half of The US housing market slowly recovered, with prices stabilising and construction activity recovering. Unemployment was trending downward, reinforcing ING s view of a recovery slowly taking hold in the US. The prolonged low growth period in the advanced economies had a negative impact on consumption, capital investment expenditures and job creation in the emerging countries. Governments in China, India, Brazil, Turkey and other emerging markets shifted their focus to reducing government deficits. Risk aversion by foreign investors around the world reduced non-debt capital flows to emerging markets, forcing them to increase domestic savings to finance new capital investments. China suffered a growth slowdown in 2012, but the economy showed signs of picking up again towards the end of the year. The uncertain economic outlook and the turbulence on financial markets in 2012 were among the factors that made ING Bank put extra focus on funding, capital and liquidity. 12 ING Group Annual Report 2012

15 ING GROUP FINANCIAL DEVELOPMENTS The operating environment was challenging throughout 2012, with volatile financial markets and an uncertain macroeconomic environment. Against this backdrop, ING Group s 2012 net result declined to EUR 3,894 million, from EUR 5,766 million a year earlier. Special items after tax were EUR 1,060 million in 2012, compared with EUR 60 million in The 2012 special items predominantly reflect costs for various restructuring programmes, which are essential to reduce our future annual expenses. Furthermore, special items include EUR 169 million in separation and IPO preparation costs, EUR 386 million in settlement costs with the US authorities, partly offset by the favourable impact of a EUR 305 million provision release following the announcement on 3 July 2012 of the new Dutch employee pension scheme. The 2011 special items include a EUR 718 million net gain from the liability management transaction offset by costs for various restructuring programmes and separation costs. Net gains on divestments, including net result on disposal and classification of discontinued operations, were EUR 1,714 million in 2012, compared with EUR 1,812 million in The 2012 results on divestments include gains on the sales of ING Direct USA (EUR 489 million), ING Direct Canada (EUR 1,135 million), and Insurance Malaysia (EUR 745 million), as well as a EUR 260 million loss on the announced sale of ING Direct UK and EUR 380 million in goodwill write-offs for Insurance/IM Korea. The 2011 gains on divestments of EUR 1,812 million were attributable to the sales of the Latin America business, ING Car Lease, and Real Estate Investment Management. The result from discontinued operations was EUR 550 million in 2012 versus EUR 678 million in 2011 and relates to Insurance Asia/ Pacific and Insurance Latin America. The decrease was due to the sale of Latin American pension, life insurance and investment management operations in ING s capital position remained strong, despite the EUR 1,125 million repayment to the Dutch State in November ING Bank s core Tier 1 ratio increased from 9.6% in 2011 to 11.9% at the end of 2012, supported by the gain on the sale of ING Direct USA and ING Direct Canada. These transactions helped ING Bank to fund a dividend upstream of EUR 2,125 million to ING Group, which was used to repay part of the core Tier 1 securities and reduce Group leverage. ING Bank s risk-weighted assets were reduced by EUR 52 billion in 2012, primarily reflecting the sale of ING Direct USA, ING Direct Canada, lower lending volumes and de-risking of the investment portfolio. The Insurance Group Directive Solvency I ratio increased to 245% at the end of 2012, from 225% at the end of 2011, mainly due to the sale of Insurance Malaysia, market developments and the introduction of the Ultimate Forward Rate (UFR) curve for the Dutch insurance entities. The Group debt/equity ratio improved to 11.1% from 12.7% a year earlier. Shareholders equity increased by EUR 7.7 billion, from EUR 46.7 billion at the end of 2011 to EUR 54.4 billion at the end of This increase was caused by the addition of net profit and positive revaluations on debt securities, partly offset by exchange rate differences and the repurchase premium paid to the Dutch State in November Shareholders equity per share was EUR at the end of 2012 versus EUR at the end of Underlying net return on equity, calculated as underlying net result divided by average IFRS-EU equity, decreased to 5.2% from 6.5% in Underlying net result held up well at EUR 2,603 million, compared with an underlying net result of EUR 2,746 million in Underlying net result is derived from the total net result by excluding the impact of divestments, discontinued operations and special items. Banking recorded an underlying result before tax of EUR 3,219 million in 2012, a 22.0% decrease compared with This decrease was mainly driven by higher loan losses, losses from active de-risking, negative credit and debt valuation adjustments and the Dutch bank levy. Insurance reported an underlying result before tax of EUR 311 million, which increased by EUR 636 million from the EUR 325 million loss in De-risking and low interest rates put pressure on investment returns, but underlying results recovered as the impact of market-related items declined to EUR 783 million in 2012 versus EUR 1,984 million in IMPORTANT CHANGES IN REGULATION AND SUPERVISION The most prominent development in 2012 was the agreement reached among the heads of European Union member states on the introduction of a European banking union. Agreement on the details and timetable is likely to take some time. Banking Union/Single Supervisory Mechanism ING supports the concept of a banking union based on four main pillars: a single supervisory mechanism (SSM), a single rulebook for prudential regulation, a common framework for recovery and resolution, and a harmonised deposit guarantee scheme. Such a union is likely to reduce fragmentation in the interbank and wholesale markets and increase the integrity of the European single market and European single currency. The SSM, which will give strong powers to the ECB for the supervision of all banks in the euro area, with a mechanism for non-eurozone countries to join voluntarily, is an important first step in achieving a banking union. It is crucial that the ECB has exclusive responsibility to carry out specific prudential tasks. Furthermore, a consistent application of the single rulebook, a single set of rules for all banks in the euro area, is key as it will diminish discrepancies between national supervisory practices. Important tasks like the authorisation of credit institutions, assessment of acquisitions and disposals, the authority to ensure compliance for capital, liquidity regime and leverage ratios, and the imposition of additional capital buffers for prudential and countercyclical reasons should be the exclusive responsibility of the ECB for all banks in the participating member states. Regulations drive up capital requirements The Capital Requirements Directives (CRD III and CRD IV) have already affected and will continue to increase the capital requirements for all banks in Europe, including ING. ING recognises the importance of mitigating systemic risk. As expected, the G20 in 2012 included ING on its list of Global Systemically Important Banks (G-SIBs). G-SIBs will be required to hold an additional buffer above the 7% core Tier 1 buffer of Basel III, to be phased in between 2016 and ING is in one of the lower categories, and therefore subject to an additional requirement of 1%. In addition, the Dutch regulator indicated that the national capital requirements for systemically important banks in the Netherlands will be in the range of 1-3% including the G20 international requirement mentioned above. ING is expected to be in the highest category in the Netherlands. These requirements must be met by The Dutch Government agreed in October 2012 that the timetable for the additional buffers for Systemically Important Financial 1 Who we are 2 Report of the Executive Board 3 Corporate governance 4 Consolidated annual accounts 5 Parent company annual accounts 6 Other information 7 Additional information ING Group Annual Report

16 Financial and regulatory environment continued Institutions (SIFIs) will be brought forward in a responsible way, taking the international situation into account. As for macro-prudential tools, CRD IV will introduce a Systemic Risk Buffer which will apply to the whole or parts of the banking sector and will be covered by the core Tier 1 capital ratio. The Systemic Risk Buffer is one of the most important deviations from the Basel III rules, as Basel does not recognise systemic risk. The details and impact of this buffer can only be assessed once CRD IV has been finalised. The delay in the implementation of CRD IV, which was scheduled for 1 January 2013, has created uncertainty about how the regulations will evolve and when they will be implemented. In particular, ING is concerned about the cumulative impact of all the various capital buffers, and the timing of their implementation. Regulatory measures that impact liquidity The liquidity position of European banks, including ING, is being shaped by CRD IV, and, in the case of ING, by regulations from DNB. The observation period of the Liquidity Coverage Ratio (LCR) was intended to start in the EU in January 2013, but this has not happened because CRD IV has been delayed. Based on input from various parties, the European Banking Authority (EBA) will incorporate reporting on a broader range of assets and will decide by 2015 on the final eligibility criteria for liquid assets. In January 2013, the Basel Committee on Banking Supervision (BCBS) announced a number of changes both in content and planning of implementation for the LCR. The proposed widening of the list of eligible assets for the LCR by the BCBS will be included in CRD IV. EU Crisis Management Framework The draft Crisis Management Framework Directive was published in June 2012, and is still under discussion at the European Parliament and the European Council. The most important elements are: recovery and resolution planning, bail-in requirements and the financing of resolution arrangements. Bail-in requirements are planned to enter into force by 2018, the other parts in ING favours the use of a designated bail-in liability class where the bail-in capital consists of subordinated instruments that may be written-down or converted in a resolution scenario with clear triggers attached to it. Banks should build up a sufficiently large layer of bail-inable debt that should be clearly defined, so that its position within the hierarchy of debt commitments in a bank s balance sheet is clear, and investors understand the eventual treatment in the event of resolution. ING Bank submitted its recovery planning package to DNB in November These included detailed tasks and responsibilities for (i) recovery in case of financial crisis, (ii) monitoring of metrics, (iii) maintenance of the recovery planning package, and (iv) implementation of certain recovery planning activities. Except for responsibilities related to recovery these tasks and responsibilities are embedded in the regular, going-concern organisation and processes. ING has defined a crisis operational framework with several specific governance arrangements that will be initiated in case of recovery. Similarly, ING has set up a procedure to monitor the metrics and a decision-making process to determine whether or not the recovery plan should be activated. Furthermore, in the course of 2012, DNB has requested the largest Dutch banks to prepare and submit information on the basis of which they will be able to develop a Resolution Plan. ING is diligently working towards providing this information and meeting the deadlines provided by DNB. Bank Structural Reform The European Commission s High-level Expert Group on Bank Structural Reform, better known as the Liikanen Committee, published its report on reforming the EU banking sector on 2 October If the size of certain trading activities compared to a bank s total activities exceeds certain thresholds, the Liikanen Committee recommends that it may be necessary to require legal separation of these activities into a separate trading entity. The shares of this trading entity could be held by a bank holding company that also holds the shares of the deposit bank. In addition, the Liikanen Committee made a number of other recommendations regarding bail-in instruments, capital requirements and governance and control. The impact of the Liikanen recommendations on ING s business model is unclear, not in the least because it is uncertain if and to what extent the European Commission will follow the Liikanen Committee separation recommendation in its legislative proposal, which is expected around the summer of ING believes in the strength of the universal banking model, combining retail and commercial banking activities. The universal banking model brings major benefits in terms of risk diversification, capital and liquidity management, consumer choice and fulfilling the needs of long-term customer banking relationships. Commercial banking activities within ING provide key support in terms of debt capital markets, hedging, cash management, trade finance and project finance, which helps serve the growing demand for integrated services, from large corporations and small and medium-sized enterprises (SMEs). The synergies achieved by combining this wide range of services within a universal bank would be lost if parts of these activities were separated or ringfenced. ING is of the opinion that moving activities not permitted in a deposit bank into a trading bank would be detrimental to the ability of banks to serve their customers. Trading activities account for only a small percentage of ING s overall activities. Many of the activities booked in the trading book are directly related to providing services to customers, such as hedging risks and securities underwriting. If trading activities had to be separated from the rest of the bank s activities, providing such customer services would no longer be possible within one bank, also due to the large exposure rules. In the Netherlands, the Wijffels Committee, named after the Dutch representative in the Liikanen Committee, was established in October The task of the Wijffels Committee is to advise the Dutch government on a number of topics, including applying the recommendations of the Liikanen Committee to Dutch banks, or whether additional measures are needed. The Wijffels Committee has been asked to submit its report by 15 June SOLVENCY II During 2012, ING Insurance/Investment Management devoted much attention to preparing to meet the Solvency II capital adequacy requirements. Both in the head office and in the business units, many measures have been taken to upgrade our existing risk measurement and risk reporting to the required levels. During the course of 2012 it became increasingly likely that the Solvency II framework would not be transposed into national law by the official deadline 1 January 2014, giving the insurance industry more time. Although ING Insurance/Investment Management sees many potential advantages of Solvency II over the existing Solvency I 14 ING Group Annual Report 2012

17 framework, we recognise that the Solvency II framework may have severe consequences, particularly on business models in which long-term guarantees are offered to customers. ING will therefore continue to take part in discussions with the industry and regulators to develop a more workable framework. In parallel with these preparations, further development of Solvency II continued. Some progress was made on the Omnibus II Directive the Directive that will amend the already-agreed level one Solvency II Directive yet the legislative process was delayed when the trilogue partners (European Commission, European Parliament and the Council) failed to come to an agreement. The main area of disagreement is the treatment of long-term guarantees under Solvency II. Ultimately, the deadlock was broken with their agreement on an impact assessment, to be executed early During the trilogue discussions, ING stressed the importance of appropriate long-term guarantee measures. A failure to put in place appropriate measures would diminish insurers ability to provide such long-term guarantees, and undermine the role of insurers as long-term investors and stabilisers of the economy. Together with other insurance companies ING proposed an appropriate balance, which will be tested in a forthcoming impact assessment. ING recognises that the disagreements on the treatment of long-term guarantees have led to a significant delay in implementing Solvency II. We also recognise that the delay has prompted some member states to consider implementing elements of Solvency II ahead of the official date. As this would create an uneven playing field and impede standardised supervision, it is important for everyone to agree on a realistic timeline as soon as possible. ING will continue to play a part in industry discussions on Solvency II. Comframe On 2 July 2012, the International Association of Insurance Supervisors released a working draft on the Comframe Insurance core principles. Comframe, short for Common Framework for the Supervision of Internationally Active Insurance Groups (IAIGs), has three main objectives: (i) develop methods of operating group-wide supervision of IAIGs, (ii) establish a comprehensive framework for supervisors to address group-wide activities and risks, and (iii) foster global convergence. The working draft received harsh criticism from supervisors and industry alike for being too detailed and too prescriptive. The IAIS will open Comframe up for a second round of consultation in Finalisation is not expected until Global Systemically Important Insurers (G-SIIs) In 2012, discussions on the methodology to identify Global Systemically Important Insurers, or G-SIIs in the terminology of the International Association of Insurance Supervisors (IAIS), continued. In those discussions, insurers have stressed that non-traditional, non-insurance activities should lie at the heart of G-SII identification. Regulators appear to prefer a much broader assessment also taking into account size and interconnectedness. A list of G-SIIs identified with this methodology is expected in the second quarter of In the meantime, the IAIS developed a policy on dealing with G-SIIs that was published for consultation. More discussions on this policy are expected in EU Unisex RULE In March 2011, the European Court of Justice ruled that insurers in Europe cannot differentiate in price or benefits for the same insurance products, based on gender. This gender-neutral pricing, commonly called the unisex rule, states that as of 21 December 2012 life insurers must offer products that are identical for men and women. To comply with this new regulation, all product portfolios across the insurance business units were reviewed. More than 90 products were re-priced in ING Insurance Central and Rest of Europe. In the Benelux, all products available for sale were reviewed in the past two years to ensure they were compliant with the EU unisex rule. From 21 December 2012, all ING Insurance s products available for sale throughout the European Union have been compliant with the rule. Alternative Investment Fund Managers Directive During 2012, ING Investment Management spent considerable time and effort familiarising the organisation with the requirements of the Alternative Investment Fund Managers Directive (AIFMD), which was agreed in 2011 and comes into effect in July In July 2012, further details of the AIFMD became clear through a draft text publication. Since then the EC has missed its deadline of September 2012 for the publication of the final version of that text due to discussions on some of the detailed AIFMD measures. ING is awaiting publication of the final text and will continue to prepare the organisation for timely compliance with the AIFMD. ING BANK REACHED AGREEMENT WITH U.S. AUTHORITIES On 12 June 2012, ING Bank entered into a Settlement Agreement with U.S. Department of the Treasury s Office of Foreign Assets Control (OFAC) and Deferred Prosecution Agreements with the Department of Justice, the United States Attorney s Office for the District of Columbia and the District Attorney of the County of New York (together the U.S. Authorities ) in relation to the investigation by those agencies into compliance with U.S. economic sanctions and U.S. dollar payment practices until Under the terms of the Deferred Prosecution Agreements, no further action will be taken against ING Bank if it meets the conditions set forth in the agreements during an 18-months period. As part of the settlement, ING Bank has paid a total penalty of EUR 473 million. As announced on 9 May 2012, ING Bank recognised a provision in the first quarter of 2012 by which this issue has been sufficiently covered. ING Bank has cooperated closely and constructively with regulators and other authorities throughout this process. The U.S. Authorities have recognized ING s substantial cooperation in the resolution and ING s efforts and commitment to continuously enhance compliance within the organization. DUTCH regulatory developments Dutch Coalition Agreement On 29 October 2012, the Dutch coalition government agreement was presented. It contained some far-reaching policy intentions for the banking sector which have still to be translated into legislation and pass through the Dutch parliament and senate. They include: The implementation of the capital requirements for SIFIs (SIFIs buffer) to be brought forward in a responsible way, based on a risk assessment and taking into account the need for an international level playing field. Dutch government support for a possible financial transaction tax (FTT) for the financial sector and membership of the group of EU member states exploring the possibilities of imposing an FTT in parts of the EU. However, a condition for the Dutch Government s support of any form of FTT is the exemption of Dutch pension funds. Legally capping variable remuneration, such as annual bonuses, in the financial sector at 20% of fixed remuneration. 1 Who we are 2 Report of the Executive Board 3 Corporate governance 4 Consolidated annual accounts 5 Parent company annual accounts 6 Other information 7 Additional information ING Group Annual Report

18 Financial and regulatory environment continued Stricter screening of bank employees to reduce risks. Enshrining banks duty of care in law. Introducing proposals to better protect citizens savings against high-risk banking, to be based on the advice of the Wijffels Committee. Moreover, the Dutch government has introduced a mandatory oath for Executive and Supervisory Board members of financial institutions licensed in the Netherlands, effective per 1 January In this oath, the Executive and Supervisory Board members of the relevant ING entities licensed in the Netherlands, declare that they (i) will perform their duties with integrity and care (ii) will carefully consider all the interests involved in the company, i.e. those of the customers, the shareholders, the employees and the society in which the company operates, (iii) in that consideration, will give paramount importance to the customer s interests and inform the customer to the best of their ability, (iv) will comply with the laws, regulations and codes of conduct applicable to them, (v) will observe secrecy in respect of matters entrusted to them, (vi) will not abuse their knowledge, (vii) will act in an open and assessable manner and know their responsibility towards society and (viii) will endeavour to maintain and promote confidence in the financial sector. If they break the oath, the supervisory authority (DNB/AFM) can decide to reassess their suitability. The coalition agreement also contains a number of measures affecting the Dutch housing market. One of these is the curtailment of mortgage interest deduction for income tax purposes: interest on new mortgages will only be tax deductible under specified repayment conditions. The policy intentions for the insurance sector include: Measures to be taken in the area of second pillar pensions basically focus on reducing the tax-favoured treatment of second pillar pensions per 1 January The increase of the insurance premium tax from 9.7% to 21% per 1 April 2013, causing a significant increase in insurance policy premiums. Fees for advice on annuities and disability insurance will no longer be tax-deductible, causing the price for advice to rise. Bank Levy On 1 July 2011, the Dutch Ministry of Finance announced a temporary reduction of the real estate transfer tax from 6% to 2% (a tax on property transactions). In this announcement, several ways of funding the reduction were identified, the introduction of a bank tax being one of them. The levy entered into force in Dutch and non- Dutch entities with banking activities in the Netherlands come within its scope. The taxable base of the levy is the liability side of the global consolidated balance sheet, with exemptions for equity, for deposits that are covered by a deposit guarantee scheme, and for certain liabilities that relate to insurance business. The levy on short-term funding liabilities (less than one year) is twice as high as the levy on long-term funding liabilities (more than one year). Of the total yearly tax proceeds of EUR 600 million, EUR 175 million is borne by ING. If a bank violates the 1:1 fixed remunerationto-variable remuneration ratio for board members set out in the Dutch Banking Code, the levy percentage will be increased. For ING, the levy increase will not be triggered as long as no bonuses are paid to the Executive Board of ING Group. Moreover, banking taxes paid by ING in other countries amounts to EUR 55 million in We believe the timing and motivation for such a bank levy to be inopportune given the economic climate and conditions in financial markets. There is also a risk that banks such as ING will face double taxation, i.e. taxation by more than one country per bank activity. Deposit Guarantee Scheme In August 2011, the Ministry of Finance and DNB published their proposal to establish an ex-ante funded (i.e. pre-funded) Deposit Guarantee Scheme (DGS) in the Netherlands. The scheme was expected to be introduced on 1 July However, as a consequence of the arrangements made by the Dutch government related to the nationalisation of SNS REAAL, ING and the other Dutch banks will be required to pay a one-time levy of EUR 1 billion in For ING, based on current limited information, this is estimated to result in a charge of EUR million. To avoid a disproportionate financial burden for banks and in view of the ability of banks to lend to the real economy the ex-ante DGS contribution has now been postponed by two years until 1 July The target level of the fund will be 1% of total guaranteed deposits in the Netherlands. This is about EUR 4 billion now, to be built up, in principle, in 15 years. The main element of the proposal is that for each bank the individual target amount is defined as 1% of its guaranteed deposit base. To reach this individual target amount, every bank pays a base premium of % per quarter of its guaranteed deposits. Additionally, a risk add-on of 0%, 25%, 50% or 100% of the base premium has to be paid by every bank, depending on its risk weighting. We expect the cost for ING to amount to EUR 100 to 150 million on a yearly basis as of the start date of the DGS contribution. The banking industry is in discussions with the Ministry of Finance on several aspects of the DGS, including banks individual contributions and the fund s target size. The Banking Code Monitoring Committee A committee to monitor banks compliance with the Dutch Banking Code was set up in 2010 and in December 2012 it presented its report. It concluded that Dutch banks had made good progress on implementing the Code, but that more could be done and that banks should put more effort into communicating their efforts to the general public. Dutch Parliamentary Committee on the Financial System The Dutch Parliamentary Committee on the Financial System ( Commissie De Wit ) held a Parliamentary Inquiry from November 2011 to January Its mandate was to analyse the acute problems that developed in the Dutch financial system between September 2008 and January 2009, to assess the measures taken to deal with those problems, and to draw lessons for the future. Key people from the Dutch financial sector were interviewed and the Committee presented its report to the Dutch Parliament in April The Commissie De Wit formulated 20 recommendations, of which 9 are relevant to banks. Recommendations include those on contributions to the Deposit Guarantee Scheme, investigating the possibility of ring-fencing bank activities outside the EU, and creating a strong European banking supervisor. 16 ING Group Annual Report 2012

19 Strategy Taking charge of change > > Continued focus on customer centricity and sustainability > > Solid financial results, continued active de-risking and a further strengthening of the capital and liquidity position > > Good progress on restructuring amid a challenging environment > > Agreement reached with the EC on amended Restructuring Plan > > Further progress towards State repayment and double leverage reduction > > Portfolio streamlined and businesses strengthened Since the financial crisis of 2008/2009, ING has put more emphasis on its priorities to put the customer first, to better balance the interests of all stakeholders, and to have strong, financially sustainable, simpler businesses. In 2012, several important milestones were reached. First, we strengthened our capital, funding and liquidity positions to meet future regulatory requirements (Basel III), and continued to take a prudent approach to risk in a volatile external environment. Second, ING and the Dutch State reached an agreement with the European Commission (EC) in November 2012 on an amended Restructuring Plan. This has given us more flexibility in completing the divestments and making adjustments on other commitments in light of the market environment, economic climate and more stringent regulation. Third, ING s repayments (including premium payments) to the Dutch State exceeded the principal amount of capital support provided in Among all the European banks that received state aid following the crisis, ING is one of the furthest advanced in repaying it; above that with a significant premium. Moreover, ING updated and streamlined its remuneration policy, and continued to reduce its risk profile. Sustainability has become more central to ING s strategy and we continue to foster dialogue with all existing and new stakeholders. ING sharpened its strategy for the Bank, and further reduced the size of the Bank s balance sheet and simplified its product range, making the company easier to manage. At the same time, we managed to increase service levels, which has won ING Bank several industry awards. On the Insurance and Investment Management side, we announced the first five sales of its Asian Insurance/IM units, and both ING U.S. (which is the new name for Insurance and IM activities in the US) and ING Insurance/IM Europe made strides in their initial public offering (IPO) preparations. STRENGTHENING THE FINANCIAL POSITION ING places great importance on strengthening its financial position in order to put itself in the best position to facilitate the real economy. Despite persistent market volatility and uncertain economic recovery in the eurozone and elsewhere, which caused ING Group s net result to decline to EUR 3,894 million, we gained in financial strength in We said that capital, funding and liquidity would come before profit in 2012 and we delivered in full on that promise. Capital and funding improved, our liquidity position remained strong, earnings remained resilient, and net exposure to riskier asset classes and activities declined. In January 2012 the Bank unveiled Ambition 2015, a set of aspirations that included generating more capital and attaining a core Tier 1 capital ratio under Basel III of at least 10% by The core Tier 1 ratio strengthened to a solid 11.9% under Basel II and 10.4% under Basel III by the end of the fourth quarter 2012 (on a pro-forma basis, taking into account the impact of new accounting rules on pensions, IAS 19R, which came into effect on January 2013). ING was also able to achieve a liquidity coverage ratio of more than 100% in 2012; a level we aimed at for In line with Ambition 2015, ING Bank s balance sheet optimisation is on track. The balance sheet was reduced by EUR 137 billion since September 2011 of which EUR 85 billion was related to the sales of ING Direct Canada and ING Direct USA. ING Bank s decrease of its underlying result before tax was mainly driven by higher loan losses, losses from active de-risking, negative credit and debt valuation adjustments and the Dutch bank levy. Our strong funding position enabled us to continue supporting 1 Who we are 2 Report of the Executive Board 3 Corporate governance 4 Consolidated annual accounts 5 Parent company annual accounts 6 Other information 7 Additional information ING Group Annual Report

20 Strategy continued our customers through lending in 2012, despite the challenging external circumstances. ING will strive to further strengthen its financial position by improving operating performance, boosting income and lowering risk and costs. The Insurance/Investment Management operating profit decreased in 2012, mainly because of a lower technical margin, higher expenses and higher deferred acquisition costs in the life business and lower non-life results during the year. The underlying result was heavily affected by losses on hedges, as ING Insurance focused on protecting regulatory capital amid volatile financial markets. GOOD PROGRESS ON AND RENEWAL OF RESTRUCTURING PLAN During 2012, ING made progress on its Restructuring Plan to fully separate its banking and insurance and investment management activities in a challenging operating environment. We announced the first five sales of our Asian Insurance/IM units, and Insurance U.S. continued with its IPO preparations. Moreover, ING and the Dutch State, reached an agreement with the EC to significantly amend the 2009 Restructuring Plan. DELIVERING ON RESTRUCTURING To obtain approval from the EC in November 2009 for the support received from the Dutch State during the financial crisis, ING had to divest WestlandUtrecht Bank by 2012, and ING Direct USA and all ING s insurance and investment management operations by the end of During the past few years the following important milestones have been reached: The operational separation of the insurance and banking activities, completed at the end of The sale of almost all of the Latin-American Insurance/IM operations in The sale of ING Direct USA, completed in February The first three sales of the Asian Insurance/IM units, announced in October Two additional sales were announced in November and December In November 2012, ING U.S. filed the registration statement for its IPO. The first sale among the Asian Insurance/IM units, announced in October 2012, was ING s 33.3% stake in China Merchants Fund, an investment management joint venture, to the joint venture partners China Merchants Bank, and China Merchants Securities for EUR 98 million in cash and a net gain of EUR 64 million. The second sale announced in October 2012 and closed in December 2012, was that of the insurance businesses in Malaysia to AIA Group. ING received approximately EUR 1.3 billion in cash in this transaction, which delivered a net transaction gain at closing of EUR 745 million. The third sale was the sale of the life insurance, general insurance, pension and financial planning units in Hong Kong and Macau, and ING s life insurance operation unit in Thailand, to the Pacific Century Group (PCG). The sale proceeds of EUR 1.64 billion in cash for this combined transaction, result in a net gain of approximately EUR 1 billion. The fourth sale, announced in November 2012, was ING s investment management business in Thailand to UOB Asset Management for EUR 10 million in cash. The fifth sale, announced in December 2012, was ING s IM business in Malaysia to Kenanga. All divestments mentioned are expected to close at the latest in the first half of ING has incurred over EUR 500 million in expenses in executing the 2009 Restructuring Plan since it started. AMENDMENTS TO THE RESTRUCTURING PLAN ING announced in November 2012 that, together with the Dutch State, it had reached an agreement with the EC on significant amendments to the Restructuring Plan. The amendments extend the time horizon and increase the flexibility for the completion of divestments and adjust other commitments in light of the market conditions, economic climate and more stringent regulation. Under the amendments, the final dates for divesting the insurance and investment management businesses have been extended as follows: The divestment of more than 50% of the Asian Insurance/IM operations has to be completed by year-end 2013, with the remaining interest divested by year-end The divestment of at least 25% of ING U.S. has to be completed by year-end 2013, more than 50% has to be divested by year-end 2014, with the remaining interest divested by year-end The divestment of more than 50% of Insurance/IM Europe has to be completed by year-end 2015, with the remaining interest divested by year-end As ING has committed to eliminate double leverage, proceeds from the divestments will be used to that end, while ensuring adequate leverage ratios for the insurance holding companies. The base case scenario for the divestment of Insurance/IM Europe and ING U.S. is through an IPO process. We are determined to maintain the momentum of the programme achieved over the past four years. We will continue our efforts to improve our performance, serving our customers, prudently managing risks and expenses to make sure that when the circumstances are right, we will be ready for the next phase in restructuring and realigning our businesses. The timing of divestments will depend on market conditions and readiness, including performance. The process of divesting the remaining Insurance and IM units in Asia continues. ING is committed to conduct these processes with the utmost diligence in the interest of all stakeholders, including customers, employees, distribution partners and shareholders. Under the terms of the original Restructuring Plan, ING was required to divest WestlandUtrecht Bank by However, due to market circumstances and changing regulatory requirements, this has not been feasible. Under the amended terms of the Restructuring Plan, the commercial operations of WestlandUtrecht Bank will be combined with the recently created Nationale-Nederlanden Bank, which is to be divested as part of Insurance/IM Europe. The retail banking businesses will be integrated in the course of 2013 and will operate under the Nationale-Nederlanden brand, with the goal of becoming a competitive retail bank in the Dutch market with its own funding capabilities and a broad distribution network. Nationale-Nederlanden Bank will offer a broad and coherent product line, with mortgages, savings, bank annuities ( banksparen ), investments and consumer credit products, combined with the core retail insurance products of Nationale-Nederlanden. ING has committed itself to ensuring that Nationale-Nederlanden Bank reaches certain targets for mortgage production and consumer credit until 31 December 2015 or until the date on which 18 ING Group Annual Report 2012

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